Market Report.
๐ The September jobs report showed much stronger than expected job growth of 254,000 NFP, easing recession fears. Chicago Fed President Goolsbee called the report “superb” and said more such data would support the economy reaching full employment without a downturn. However, he reiterated gradual rate cuts will still be needed over 12-18 months to sustain the strong labor market and ensure 2% inflation. Most Fed officials see rates ending between 2.5-3.5%, though a higher outcome is possible if productivity and growth remain robust. The strong jobs gains lessen the urgency for outsized cuts while supporting the case for a higher terminal rate than previously projected. As a consequence, US bond yields rebounded sharply, with the 2-year bond now approaching 4%.
๐ถ ECB governing council member Francois Villeroy de Galhau said the central bank will “quite probably” cut interest rates at its October meeting. Inflation fell below the ECB’s 2% target in September and core inflation is expected to gradually recede close to that level in 2025. Market expectations for 2025 inflation are even lower than the ECB’s forecast, shifting the balance of risks. โIf we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there wonโt be any reason for our monetary policy to remain restrictiveโ He said. Villeroy played down risks from potential higher oil prices due to geopolitical tensions, unless impacts spread to core inflation.
๐ฌ๐ง UK jobs data showed pay growth rose at its slowest pace in almost 4 years in September, likely reassuring the Bank of England. The REC/KPMG survey found permanent job placements extended their two-year downtrend, though the drop was softer than in August. The slowing trends in hiring, pay growth, and vacancies point to a cooling jobs market, reinforcing the BoE’s stance.
๐ The optimistic rally on the back of China’s stimulus announcements may have run out of steam. We have not yet seen a correction in the Chinese stock markets, but little by little we will see prices adjusting. Managers like Invesco and JPMorgan are waiting to see concrete implementation of stimulus before adding to positions, concerned about past false starts. HSBC and JPMorgan say more significant fiscal easing is needed to sustain the recovery and achieve 2024 GDP growth targets. Goldman remains bullish, forecasting further 15-20% gains if authorities deliver promised policy support.
๐ Corporate earnings reports starting this week will be important for determining if stocks can maintain their strong 2024 gains. Analyst estimates for S&P 500 Q3 earnings growth have fallen to a projected 4.7% YoY rise, the weakest in 4 quarters. Market obstacles include the upcoming US election, questions around the pace of Fed rate cuts, and geopolitical risks like higher oil prices. the Fed’s easing has historically boosted stocks, especially outside recessions. The key companies this week will be, JP Morgan, Pepsico & Wells Fargo.
Market View:
๐ Mini S&P 500 futures remain weak after Friday’s employment data. As we have explained in multiple reports, positive data indicating strength in the US economy is not necessarily good for stocks as it takes away the urgency to cut rates and thereby prolonging high financing costs.
๐ The Mini S&P 500 is trading at 5770 points, below new resistance at 5800 points. The Nasdaq 100 also failed to trade above 20,000 points at 19,925 points.
๐ต The dollar index, as might be expected, reflects the strength of the dollar in the face of fears that the next rate cuts will take longer to come. The EURUSD, which a few days ago was above 1.12, has fallen to near 1.0950. The US 2 year bond has rebounded towards 4% return, again reflecting higher interest rates for longer.
๐ช๐บ In Europe, the DAX 40 is returning towards the 19,000 point area. The Eurostoxx 50 is trading back below the 5,000 point resistance.
๐ข๏ธ Oil prices are rising sharply, with Brent crude approaching $80 a barrel, driven by what looks like an imminent all-out war between Iran and Israel. In this context, US oil company ExxonMobil has broken all-time highs and is trading above $122. Gold is still below its new highs, but extremely strong, trading at $2.675/oz at the moment. Bitcoin, which over the weekend climbed towards 64,000$, is currently retreating towards 63,000$.
Geopoliticis:
๐ Israeli PM Netanyahu hit out at French President Macron for calling to stop arms shipments to Israel used in the Gaza conflict as part of seeking a political solution. Netanyahu called it a “disgrace” and said Israel will win with or without their support. Macron said the priority is a political solution and halting weapons delivered to fight in Gaza, as France does not ship arms there. “The Lebanese people must not in turn be sacrificed, Lebanon cannot become another Gaza,” he added. Israel has intensified bombing of Lebanon and sent troops over the border after nearly a year of clashes with Hezbollah.
๐ However, new data from the Stockholm International Peace Research Institute (SIPRI) shows Germany has become the biggest European arms exporter to Israel. Overall, arms exports from EU and NATO countries to Israel have grown significantly amid the ongoing war between Israel and Palestinian militant groups. Germany’s arms sales to Israel in 2023 totaled $887 million, overtaking France which exported $559 million worth of arms in the same period.
๐ The US is discussing potential strikes on Iran’s oil facilities in retaliation for Tehran’s missile attack on Israel this week, according to President Biden. However, we believe that the US will not do this, as it could affect the world oil supply, considering that Iran could attack Saudi oil routes and trigger a spiral of rising oil prices, which would generate an inflationary shock, which the US has been trying to prevent for the last two years with immense effort.
๐ On the first anniversary of the Al-Aqsa flood, Al Jazeera’s Jamal Rayyan reports on a 4.6 magnitude earthquake in the Iranian desert, attributed to Iran’s first nuclear test. This event highlights global concerns about regional stability and the balance of power in the Middle East. The news may in fact have changed something. Given that Israel threatened at the weekend to launch an attack in the next 48 hours on Iran, which closed its airspace yesterday in anticipation of an imminent attack that would have been postponed, given that it has reopened it.